SEBI Receives Anonymous Complaint On SME IPO Merchant Banker Lapses — Profit Exclusive

The Securities and Exchange Board of India is looking at lapses by SME IPO’s merchant bankers and has asked for wider disclosures on anonymous complaints, people in the know told NDTV Profit. 

This is about implementing rules, as loopholes are being seen related to the merchant bankers in SME IPOs, the people said on the condition of anonymity. 

The markets regulator had received an anonymous complaint dated Dec. 4. In a mail sent to SEBI’s employees, an individual made severe allegations against the merchant bankers. NDTV Profit saw a copy of the mail. 

The complaint urges immediate investigation into the alleged "open loot" facilitated by merchant bankers. Specific allegations include extortionate fees, manipulation of pre-IPO shares, and control over escrow accounts.

As per the letter, merchant bankers allegedly demand 7–15% of IPO proceeds under various heads and exercise control over escrow accounts, withholding funds until issuer companies meet their demands. Additionally, it accused the bankers of manipulating stock prices by creating artificial demand and orchestrating upper circuits through pre-IPO dummy investors and associated entities.

Merchant bankers, often tied to market makers, allegedly made profit from trading market maker quotas, while collecting upfront fees for three years, regardless of market performance. The complaint also mentioned the name of a merchant banker and other entities, but NDTV Profit has chosen not to disclose specific details due to the anonymous nature of the complaint. 

The allegations mentioned in the complaint are yet to be substantiated, and no official response had been issued by SEBI or the entities named in the letter at the time of publishing this report.

However, the regulator itself has been very proactive in its approach towards SME IPO issues in the past as well. 

On Dec. 3, 2024, SEBI ordered Trafiksol ITS Technologies Ltd. to refund Rs 45 crore, that had been raised through IPO. This was reportedly done due to allegations of collusion with a shell entity and incorrect statements in its prospectus. The Trafiksol IPO had also been postponed in October by BSE due to investor complaints. It had been oversubscribed by 345 times.

In addition to this, another SME IPO was of Rosmerta Digital Services Ltd. It was supposed to go on the floor Nov. 18, 2024, but ended up getting postponed due to several complaints received by SEBI after their DRHP was made public. 

Apart from regulatory actions against individual entities, SEBI had also issued warnings about the SME IPOs to the investors last year and eventually approved stricter regulations for stricter oversight of the small and medium enterprises’ IPOs in its last board meeting. 

The new regulations require that an issuer must have an operating profit of Rs 1 crore for at least two of the last three financial years to be eligible for an IPO. Additionally, the offer for sale by selling shareholders in SME IPOs will be capped at 20% of the total issue size, and shareholders cannot sell more than 50% of their holdings.

As per the new monitors, 50% of the excess promoter holding will be unlocked after one year, and the remaining 50% will be released after two years. Further, the process for allocating shares to non-institutional investors in SME IPOs will now align with the mainboard IPOs.

To prevent excessive fund allocation to non-essential purposes, the regulations also cap the amount allocated for general corporate purposes to only 15% of the total funds raised or Rs 10 crore, whichever is lower.

Furthermore, SME IPOs will not be allowed if the proceeds are intended for loan repayment to promoters, promoter groups, or related parties, either directly or indirectly.

SEBI has also asked the intending entities to make available their DRHP for SME IPOs to the public for 21 days in newspapers, accompanied by a QR code for easy access.